With consumers demanding more comparison tools for buying financial products online, the fund supermarket faces the next challenge in its development
While it has been a difficult 12 months for online financial services, the fund supermarket model has continued to emerge as one of the most important e-commerce capabilities required by individual investors and the financial services industry.
The consumer is becoming more knowledgeable about investment products and financial services in general. In addition, people now have a greater need to compare and contrast a range of financial products inclusive of various fund performances prior to purchasing. There is no question that the future of financial product distribution is one of many and various distribution channels and many and various products.
During the period from 1995-1999, the European retail mutual fund supermarket was the second fastest growing sector of the European savings and investments market, experiencing a 25% compound annual growth. Figure 1 shows the growth of mutual funds and the assets invested.
This market is too great an opportunity to ignore for financial service organisations, not to mention the anticipated growth of around 10% estimated to occur between 1999 and 2004.
In effect, this suggests that there will be an additional euro 1.6bn assets to be invested in the various fund distribution channels during this five-year term. Together with the growth in European households of internet connectivity, which is assumed to be approaching 50%, this suggests that there may be an evolution in fund distribution, utilising the online fund supermarket as a distribution channel. The further development of integrated interactive digital TV will further enhance client internet driven distribution.
As a result, it is estimated that there are approximately 40 companies within the fund supermarket sphere in Europe competing for this business. How many of these are effectively fund supermarkets and are providing an actual fund supermarket is a bone of contention in the industry. Choice however is probably the defining criterion. As a result, many of the fund supermarket players are now looking to broaden their fund offering and seeking to appeal to a more diverse customer base. There are many barriers to overcome in the European online retail fund market, however. These are primarily cultural, regulatory, and operational. Furthermore, there are also processing, custodial, linguistic, brand acceptance and security issues to deal with.
Whether the model is B2B, B2C or B2B2C, it appears that the brand is a primary key in gaining widescale acceptance for any individual fund supermarket when operating or attempting to enter a new region. An effective approach may be to leverage on an existing brand or the endorsement of that brand and its repackaging.
Direkt Anlage Bank (DAB), a subsidiary of Hypovereinsvink, is probably the closest there is currently to a pan-European fund supermarket. This has been achieved primarily through their acquisition of Self-Trade, which opened up additional distribution platforms for DAB in France, Italy, Spain, and the recently launched UK market. It has resulted in a growth in total customer numbers to over 300,000.
An alternative to leveraging on an existing brand is the development and exploitation of strategic partnerships and to gain maximum synergy of brand and fund distribution expertise. Egg has more recently changed its model from that of being direct B2C to B2B2C, as seen in its recent initiative with Microsoft and its declared entry strategy for Europe.
Fundsworld, the Italian Fund Supermarket launched by Banca Intesa, is planning expansion into the Austrian, German, French and UK mutual fund markets and is seeking to achieve strategic partnerships with leading banks in each of these markets as an entry strategy.
European Banks currently dominate approximately 80% of mutual fund distribution and in many instances have well-established national brands. It is therefore hardly surprising that a study of European fund supermarkets reflects the movement of European banks within the European mutual fund industry, as they redefine their role from fund manager to fund wholesaler and distributor.
There is also a movement of financial institutions that provide custodial and back office services in the integration of providing a front, middle and back office capability to their strategic partners and banking groups. European banks with well-established national brands include Comdirect (Commerzbank, Consors), DAB/Selftrade (Hypovereinsvink Bank) E-Cortal (BNP), Fundsworld (Banca Intesa), Patagon (BPVA) and US Funds Supermarkets One Source (Charles Schwabb), FundsNetwork (Fidelity), Brokerage Front Access (Vanguard).
The current UK fund supermarkets are Ample (AMP), Charcol-online (Charcol, Bradford & Bingley), Co-Funds (Gartmore, Jupiter, M&G & Threadneedle), Egg (Prudential), FundNetwork (Fidelity) and Fundsdirect (Independent).
In the 1990s, the US banks lost out in the fight for market share of the US mutual fund market when Charles Schwabb and Fidelity established their fund supermarkets. Today, they hold between 80% and 90% market share of the US retail fund supermarket industry.
In Europe, banks maintain greater customer loyalty and financial credibility and have no intention of losing customers and market share to new or existing entrants from the US. In effect, they retain the bridge of cultural acceptability.
Having crossed this bridge, there are however operational challenges that must be addressed when adapting any country-specific fund supermarket for the European market. In the UK, there is currently no standard settlement system that accommodates straight through processing (STP) for funds, even with EMX. Consequently, the nature of fund dealing in the UK is still very manually intensive and faxes and telephones still play a major role within most back offices.
Settlement times are therefore undemanding at T+5 for a fund purchase and perhaps slightly longer for a sale. This is not the case on the continent where settlement times for funds are more closely related to those of equities, the average at T+2.
For the fund supermarket to obtain credibility within the major European mutual fund markets and gain market share quickly, it is imperative to be able to meet more demanding settlement times and process deals quickly and efficiently.
Two main electronic processing and settlement systems have been developed for the European mutual fund marketplace, by Euroclear and Clearstream respectively, to cater for this demand. Euroclear's fundsettle is probably the more comprehensive of the two services at present offering processing and settlement services for over 12,000 offshore funds.
It is anticipated that the service will be extended for the German and UK markets by year-end with further extensions planned for the Spanish and Italian domestic mutual markets early next year. In addition, many of the clearing agents are migrating their business models to include various offerings targeted at fund supermarkets, these include FETA and Fastnet.
Current proposed amendments to the UCITS would have considerable advantages for fund supermarkets trying to adapt their offerings to country-specific European markets and could lead to a big increase in pan-European initiatives.
The first amendment will extend the type of funds sold under the UCITS directive to include derivative, money market and fund of funds. The second will provide a passport system for fund management companies of one state to set up funds in other states. Through the establishment of websites in the various European local markets, fund supermarkets may be able to enter these markets utilising centralised clearing, dealing, processing and settlement and not have to establish any alternative distribution channels.
Furthermore, they will be able to offer a large range of funds from European providers and provide much more sophisticated products to the retail investor.
While this could build individually branded fund supermarkets, we believe it is more likely to take place through affinity, co-branded, joint venture or revenue-sharing arrangements with the accepted local brand.
There are around 40 companies competing for fund supermarket business in Europe.
UCITS proposals could lead to non-upsurge in pan-European initiatives.
European banks currently dominate 80% of mutual fund distribution.
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